The remittance effectTHE
REMITTANCE
EFFECT
A LIFELINE FOR DEVELOPING ECONOMIES
THROUGH THE PANDEMIC AND INTORECOVERYJANUARY 2021

WESTERN UNIONFORWARD

they send across the world's borders has helped
smooth the pandemic's economic shocks and foster
resilience and recovery in their home nations
throughout 2020 and into 2021 and will continue tobeyond.

A message from Hikmet Ersek, President
and CEO of Western Union

When times get hard in developing economies,
remittance-senders become front-line providers of
economic security. Simple arithmetic shows us that
remittances' magnitude, reliability, and cascading
effect make them a crucial building block indeveloping economies' efforts to return to normalcy.
When these streams are well organized, goodthings naturally happen. Struggling developing
economies are boosted, an emerging generation is
educated, and an overall improved standard ofliving, especially during and post pandemic.

At Western Union, we have long admired anddrawn inspiration from the millions of global citizens
who cross borders to work, live, study, and advance
prosperity for themselves and their families.
We help them to support their loved ones globallyby sending their money worldwide through what is
likely the world's widest-reaching financial network.
In earning the privilege to serve our customers, weknow first-hand of the dual role they perform inadvancing their own economic prosperity while
supporting their families thousands of miles away.
We know they contribute the human capital thathelps the functioning of a robust economy. They
serve on the front lines in their host communities, as
medics, scientists, grocers, bus drivers,
construction workers, and teachers.
We also know that they close the distance gap with
their families by sending love and support in theform of money. We have seen that when this money
moves fluidly, good things happen: A child goes tocollege, a business expands, emergency aid arrives
the moment it is needed, and whole nations thrive.
This report illustrates what we already know: thecrucial role global remittances play in developing
economies often impacting families and economies
much more rapidly than governments and private
direct investment can do These individuals quickly
and efficiently put money directly into the hands oftheir loved ones; back in their home countries,
those loved ones then use the money to fund a
broad range of economic activity.
This report emphasizes their actions—especiallyduring an unprecedented global pandemic—andshines an even bigger spotlight on the importanceof remittances and those who send them. They area resilient and inclusive global economic force.
At Western Union, we call these individuals heroes
for the essential lifeline they represent to their homecommunities. However, this report justifies
bestowing a new title upon our customers, these
global citizens, and local heroes: the world's"Economic First Responders." The love and money

Policymakers, development experts, andeconomists must give cross-border remittances theconsideration and priority they deserve as asignificant global economic engine. I advocate forpolicymakers across the spectrum to prioritize legal,
smart, safe, and equitable cross-border migration
systems, which will uplift developing nations'
economies. Equally important is the need to create
capacity and capability for the funds they sendhome to be turned into productive investments andhelp pave the path for economic prosperity for all.
In the monumental, post-pandemic economic
rebuilding of developing nations that lies ahead,millions of these economic first responders willcontinue to step up. There has simply never been agreater need for innovation and technology thatprovides the on-the-ground financial support flowing
instantly across borders.
Connecting people, businesses, and societies toenhance greater prosperity is the purpose thatdrives us. For 170 years, Western Union has
connected individuals to their families and loved
ones globally, virtually anywhere, anytime. Once,
we linked our customers through the wires of aworldwide telegraph network; today, we connect
them through one of the world's largest global
financial networks, moving 130 currencies digitallyto almost any point on earth in minutes. In an age
when speed, security, convenience, and trust mean
everything, we pledge to continue to bring ourcustomers and clients greater ease, access, andconfidence with every transfer they make.

TABLE OF CONTENTS
Executive summary ............................................................................................. 1
1. Introduction...................................................................................................... 8
2. Background ..................................................................................................... 9
2.1 Historic trends in remittance flows ........................................................... 9
2.2 The impact of immigration on host economies ...................................... 12
3. Impact of COVID-19 on the economy and remittance flows ......................... 14
3.1 Impact of COVID-19 on the economy .................................................... 14
3.2 Impact of COVID-19 on remittance flows .............................................. 18
4. Socio-economic and development impact of remittances ............................ 26
4.1 Tracking the remittance effect ................................................................ 26
4.2 Use of remittances in recipient countries ............................................... 27
5. Measuring the impact of remittances ............................................................ 29
5.1 Literature review evidence ..................................................................... 29
5.2 Quantifying the economic effect of remittances ..................................... 30
6. Conclusion..................................................................................................... 33
Annex I: Measuring remittance flows ................................................................ 34
Annex II: Migration policies in the wake of COVID-19 ...................................... 36
Bibliography....................................................................................................... 38

EXECUTIVE SUMMARY
Remittances are an
indispensable but
underappreciated source offinancing for developing
countries to attain SDGs andto support economies andhouseholds, especiallyduring the pandemic.

Remittances generate crucial positive economic and social effects that
support developing economies in many ways. Although these flows
slowed during the pandemic, they remained more resilient than otherprivate capital flows, making them even more important as a source of
foreign inflows for receiving countries.
Although the World Bank estimates that remittance flows to developing
countries (low-and-middle income economies) contracted by 7.0% in
2020, this decline is likely to have been far less severe than the downturnin private investor capital. For example, UNCTAD estimates that foreign
direct investment (FDI) to developing economies experienced a decline in
the range of 35-45% in 2020.
Looking forward, the World Bank predicts that remittance flows todeveloping countries will contract by a further 7.5% in 2021. But theoutlook remains subject to a high degree of uncertainty with both upsideand downside risks. A wider set of dynamics – including central bankdata outturns for 2020, economic outlooks for the world economy in 2021,
survey data and remittance consumer market fundamentals – suggestthat while there are downside risks, there is also potential that 2020 and
2021 will not turn out as weak as predicted by the World Bank and for aperiod of strong remittance growth in the medium-term as sendereconomies recover and demand from developing economies remains
high.
The remittance effect contributes to global inter-dependence
Remittances are the hidden engine of global connectivity, linking individuals
and contributing to interdependence at the worldwide level – social, economic,
and political. There is no government intervention involved in remittances;individuals are single-handedly responsible for the massive movement of
capital across the world's borders. Historically, remittance flows have remained
relatively stable through the business cycle, thereby providing support tohouseholds in the face of economic adversity. These flows are targeted to meetthe specific needs of the recipients in developing economies, compared to, incases, the more delayed impacts from the fiscal response of governments andoverseas development aid (ODA).
Remittances act as a form of ‘social insurance’ for households

While migrant remittances
contribute to thedevelopment of their homecountry, migrant labour also
contributes positively to thehost country economy.

At a micro level, remittances benefit recipient households in developing
countries by providing an additional source of income that helps fundexpenditures and lowers incidences of extreme poverty. These flows, in effect,act as a form of 'social insurance', supporting households' capabilities to resist
economic shocks. Transfers can also help recipients increase spending on
essential goods and services, invest in healthcare and education, and allow
them to build their assets.
At a macro level, remittances fund additional spending in the economy,
stimulating demand for goods and services. Money spent in one area isreceived as income elsewhere, leading to further rounds of spending that ripple

1through the economy. In addition to these direct, short-run effects on national
output, remittances also fund investments in human and physical capital,
whose full transformative benefits are only realised in the long-term.
According to the World Bank, international remittances totalled $717bn in 2019,with more than three-quarters of these flows ($548bn) bound for developing
countries. These flows now exceed ODA by a factor of three and have also
now overtaken FDI to become the largest inflow of foreign capital (excluding
exports) to developing markets. Despite the indispensable role played byremittances, their position in the world economy is somewhat
underappreciated.
Impact of the pandemic on remittances in 2020 and outlook for 2021
The economic impact of the pandemic and the resulting fall in employment andincome in migrant-hosting economies, and in some countries a decline in the
migrant workforce with return migration, is inevitably having an impact on the
global remittance market in 2020. Latest World Bank estimates indicate that
remittance flows to low and middle-income countries fell by 7.0% in 2020 (vs. a
20% decline predicted in April 2020), with a further decline of 7.5% predicted in
2021.
The cumulative 14% fall over these two years would be unprecedented in the
recent history of remittance flows, which have tended to trend upwards yearover-year. While remittances fell by 5% in 2009 during the Global Financial
Crisis, they rebounded in 2010 as the world economy started to grow again.
That said, the current economic crisis is also unprecedented in terms of its
depth and is a different type of crisis to the Global Financial Crisis.

Remittances are the hidden
engine of globalization andcontribute to global
interdependence at all levels- social, economic andpolitical.

The level of uncertainty around the economic outlook and fundamentals
impacting the remittance market is currently much higher than usual, with someindicators suggesting that remittance flows could prove more resilient than
expected. This includes positive data for 2020 on remittance inflows fromseveral central banks in receiving countries 1, positive earnings data fromleading money transfer companies2, as well as survey evidence indicating theresiliency of senders, who have been highly motivated to support families andloved ones back home3.
Oxford Economics' expectation for a sharp rebound of GDP growth in sendereconomies this year also suggests the potential for a more positive outlook forremittances in 2021 (albeit this may be counterbalanced by migrant workers
having already or being forced to return home or revisit their plans taken before
the pandemic). Demand for remittance inflows from developing economies isalso likely to remain high, as the vaccine rollout in these countries may beslower, and governments have less fiscal capacity to support economies.

1

Central bank data for Jan-Oct 2020 show positive year-on-year growth in remittance inflows for Bangladesh, Dominican
Republic, Guatemala, Mexico, Pakistan, Thailand, El Salvador and Kenya.
2
For example, Western Union reported a 6% increase in transactions in its third financial quarter compared to the same period
last year, while MoneyGram reported 10% growth in international transactions between July and September.
3
Western Union COVID-19 Consumer Pulse Survey

2Given this uncertainty, the remittance outturn for 2021 could fall anywhere
within a wide range between a decline and a return to the pre-pandemic trendof positive growth.

3

The remittance multiplier
The remittance ‘multiplier’ effect refers to the proportional amount of
increase in output of the recipient country that results from a transferof these funds into the receiving economy.
Estimates of the magnitude of remittance effects in recipient
economies vary significantly and so we have used an average of thestudies reviewed. Reasons for variation can include differences in
sub-national and national-level effects, differences in the time period
over which the impact is being measured, and differences in country
characteristics such as final use of funds and import propensity etc.
The average across studies suggests a multiplier value of 0.4,
indicating that every $1 of remittances translates to a $0.40 increasein final domestic GDP. Applied to the World Bank developing-country
remittance estimate of $548bn in 2019, this translates to a direct GDP
impact on these economies of $219bn (the domestic recipient
economy GDP impact is $219bn in total – not $548bn plus $219bn –because part of the remittance short-term impact is used for imports orsavings).
The fact that the remittance multiplier is lower than one is reflective of‘leakages’ – some of the funds are saved or used to pay off debt (notspent) and a high share of spending in developing economies is likely
to be on imported goods (e.g. medicines). A lack of investment
opportunities in developing economies may also explain why
remittance flows often fail to generate self-reinforcing development.
But as noted by the World Bank (2006), multiplier effects may well belarger at the regional level.
In general, the magnitude of the average remittance multiplier iscomparable to or higher than multiplier estimates for FDI and ODA,
which have also shown some mixed results. For example, Rajan and
Subramanian (2005) estimate that a 1% increase in the ratio of aid to
GDP should at most raise economic growth by 0.16%, assuming all
aid is invested, or close to 0.1% if some aid is wasted or consumed.
Studies of FDI suggest diverse effects at the country level depending
on absorptive capacity and institutional quality.
The average remittance multiplier estimates of 0.4 also reflects only
the short-run impact of spending rather than the longer-run impacts on
the economy’s supply capacity due to the transformative effects ofincreased spending on education, health and other investments. In
Oxford Economics’ view, the available literature therefore has
shortcomings in terms of fully measuring the economic impact ofremittances and multiplier effects. A more complete measure of
remittance economic impacts including short and long-term effects
would likely result in a larger multiplier than 0.4.

4The economic impact of remittances
As discussed in Section 5 of this report, a large body of research confirms that
remittance flows contribute to poverty alleviation in developing economies –and enable households to invest in human and other capital as well asenterprises. Collectively, in receiving countries, remittances support economic
and financial stability, improve creditworthiness, and promote economic growth.
Migration also contributes positively to host country economies by providing
both lower cost and skilled labour, including in sectors that otherwise would
face shortages, broadening tax bases and creating demographic support foraging worker populations.
Many host/sender economies experienced record falls in GDP in 2020, despite
varying levels of government stimulus support. Further, there has been adisproportionately high impact on the migrant workforce in these economies interms of loss of jobs and earnings, given the sectoral profile of migrant workers
and how the pandemic has impacted certain sectors more than others. For
some developing countries, where governments have been less able to support
their economies, the pandemic's economic shock has been further exacerbatedby a decline in remittance flows.
Oxford Economics' analysis suggests that the impact on GDP - from shocks to
inbound remittances in 2020 - should be relatively modest for larger recipient
economies, such as India, where remittances represent a relatively small shareof GDP. However, the impact on GDP may be much more significant forsmaller countries, such as Tonga and Nepal, whose economies andhouseholds are much more dependent on remittances.
Nevertheless, the continued flow of remittances, even at reduced levels, is a
crucial lifeline for these economies. And for some countries, such as Mexicoand Pakistan, remittances may even have increased throughout 2020
compared to 2019, helping to offset the severity of their downturns.
Looking ahead, the ongoing resiliency of remittance flows will represent a
crucial lifeline for many developing economies, contributing to economic
recoveries where governments remain fiscally constrained, ODA may be slow
to respond and inward FDI is likely to take time to recover to pre-pandemic
levels (a trend seen following the Global Financial Crisis). And while migrant
remittances contribute to the development of their home country, studies showthat the net contribution of migrants to their host economy is also nearly always
positive4. Migration should therefore be accepted as mutually beneficial for bothorigin and destination countries.

4

For example, see OECD (2014)5

Fig. 1. Outflows of remittances by sender country, US$bn (2019)

Source: World Bank
Fig. 2. Inflows of remittances by recipient country, US$bn (2019)

Source: World Bank

6

Fig. 3. Inflows of remittances by recipient country, % GDP (2019)

Source: World Bank7

1. INTRODUCTION
The rising value of remittance flows into developing countries in recent years isoften not widely appreciated. At a macro level, these flows support growth andare less volatile than other private capital flows, tending to be relatively stablethrough the business cycle. Understanding the role and importance ofremittances is particularly important at the current juncture, with the global
economy experiencing a uniquely sharp and synchronized shock as a result of
COVID-19.
In this context, this report examines the available evidence on remittance flows
and their potential economic effects. We do not aim to present new, original
empirical estimates of effects, but rather this study presents a review of theavailable evidence on remittances and their effects gathered from various data
sources and academic studies.
The report begins with a review of developments and trends in remittanceflows, including a focus on 2020 and the outlook for 2021. Evidence is thenpresented on the use of remittances by recipients and their potential economic
impact. We explore and show how remittance flows remain a crucial lifeline insupporting developing economies through the current pandemic crisis and into
the recovery.

8

The remittance effect

2. BACKGROUND
2.1 HISTORIC TRENDS IN REMITTANCE FLOWS
Remittances refer to the transfer of money to households across nationalboundaries by migrant5 workers located abroad. It is difficult to estimate theexact value of remittance flows because many transfers take place throughunofficial channels6. But data on officially recorded remittances indicate thatthese flows have been growing rapidly over past decades and now represent
the largest source of foreign income (excluding exports) for many developing
countries.
According to the World Bank, international remittances totalled $717bn in 2019,with more than three-quarters of these flows ($548bn) destined for developing
countries. Remittance flows to these countries have seen an impressive eightfold increase over the past two decades, outpacing growth of all other sourcesof foreign capital. Over the same period, portfolio flows increased by a factor ofsix, whilst foreign direct investment (FDI) and official development aid (ODA)
increased by a factor of three7. In fact, 2019 represented a landmark forremittances to developing countries, overtaking FDI to become the largest
inflow of foreign capital to developing markets (excluding exports).
Fig. 4. Foreign capital flows to developing countries

The three largest recipients of remittances in 2019 were the populous
countries of India, China, and Mexico. When measured as a share of GDP,
however, small countries, such as Tonga, Haiti, and Lebanon, have the highest
ratios, with inward remittances accounting for more than 30% of GDP. The
largest sources of remittance flows are developed countries with large migrant
populations, such as the United States and the Gulf states of Saudi Arabia andthe UAE.

In this report, the term ‘migrant’ is assumed to include all overseas workers, including immigrants
and expatriates.
6
Issues around the accuracy and consistency of remittance data are discussed in Annex I.
7
It should be noted, however, that remittances are private funds and cannot replace Official
Development Assistance and other public spending.
59The remittance effectFig. 5. Top 10 recipients of remittances globally in 2019

Fig. 6. Top 10 senders of remittances globally in 2019

Historically, remittances have tended to be relatively stable and do not closely
follow business cycles -- in contrast to debt flows and FDI, which are procyclical8. Therefore, remittances can be viewed as a form of insurance against
income shocks in developing economies, helping support and smoothhousehold consumption. Indeed, data show that remittances are a relatively
stable source of foreign inflows as compared to exports, FDI or portfolio flows(which are more cyclical and volatile), with a standard deviation9 that is closer
to ODA.

8

Evidence on the behaviour of remittances over the business cycle is presented in De et. al. (2016)
Standard deviation is a measure of the amount of variation or dispersion of a set of values around the mean.

910The remittance effectFig. 7. Volatility of foreign flows to developing countries

As a source of foreign income, remittances also contribute significantly to thebalance-of-payment current accounts of many developing countries. A high andsteady net inflow of remittances can improve the sustainability of the current
account and help finance existing trade deficits. In turn, this reduces thelikelihood of balance-of-payment crises as countries are more able to meettheir external obligations10. Increased currency stability benefits the receiving
countries by promoting increased investment and trade whilst also avoiding
sharp depreciations that would otherwise lead to higher domestic inflation,
increased cost of living and higher business and investment costs.
Fig. 8. Contribution of remittances to balance of payments current
accounts, select recipient economies in 201910

For example, see Hassan and Holmes (2015)

11

The remittance effectNotwithstanding the historic stability of remittance flows, the economic shockfrom the pandemic represents an unprecedented event that has affected all
countries. Indeed, seven of the 20 countries with the highest number of
COVID-19 cases – the USA, India, Russia, France, the United Kingdom, Italy,
and Germany – were among the 20 countries from which the highest amountsof remittances were sent in 2019. Remittances sent from these seven countries
alone made up 44 per cent of all global remittances received in 2019. This
creates an uncertain environment for global remittance flows, as migrant
workers tend to be more vulnerable to a loss of employment and income during
an economic crisis in the host country. This is especially true during the
pandemic, with migrant-intensive sectors such as hospitality being severely
impacted.
2.2 THE IMPACT OF IMMIGRATION ON HOST ECONOMIES
Times of economic crisis often provoke public antagonism towards migration.
However, it is important to look at the overall contributions of migrants to their
host economies -- and not just the short-term impact during difficult times.
In the short run, the impact of immigration on wages and employment in thehost economy depends on the extent to which migrants have skills that
substitute or complement those of existing workers. When migrant workers aresubstitutes for existing workers, immigration can increase competition for jobs
and put downward pressure on wages. In turn, this can displace existing
workers and increase unemployment, especially if they are not willing to accept
lower wages.
In contrast, the expansion of production in sectors that use migrant labour canincrease demand for labour and drive wages back up. In addition, migrants
expand consumer demand for goods and services, which eventually leads tothe creation of more jobs. In fact, most empirical research shows little long-term
negative impact of immigration on overall employment rates. Immigration has
also been shown to have a relatively small effect on the average wage,
although effects are more negative for low-paid workers and positive for highpaid workers11.
Additionally, research shows that the net contribution of migrants is nearly
always positive, as they contribute more in taxes and social benefits than theyreceive from the host country12. Importantly, immigration increases the numberof potential taxpayers, which means they can fulfil an increasingly importantrole for most advanced economies in coming years as population growth slows
and life expectancy rises. The United Nations projects that by 2050 the total
population will be shrinking in almost half of all advanced economies, making
migration crucial in alleviating the challenges of ageing populations. Advanced
economies must either accept lower levels of economic activity as workers age
out of the workforce or find a suitable replacement, such as migrants, for thoseageing workers, or uplift their productivity performance (Figure 9).

11

A review of empirical literature on the employment and wage impacts of immigration is provided by the National Academy of
Sciences (2017)12
For example, see OECD (2014)

12

The remittance effectFig. 9. Diverging trends in working-age populations between top
remittance sender and receiver countries

13

The remittance effect

3. IMPACT OF COVID-19 ON THE
ECONOMY AND REMITTANCE FLOWS
3.1 IMPACT OF COVID-19 ON THE ECONOMY
In contrast to the Global Financial Crisis of 2008-09, when developing
economies were less affected and continued to grow, developing countries are
expected to experience a contraction of GDP in 2020 (Figure 10). Developed
economies will sustain deeper falls in output in 2020, partly linked to theseverity of their lockdowns and the size of their service sectors (Figure 11).
Still, some advanced economies could vaccinate a significant portion of theirmost vulnerable citizens in early 2021, which will allow them to begin liftingsome restrictions in March or April. This will likely include more migrantintensive service sectors, triggering a mid-year rebound in growth and helping
them to recover faster than developing economies this year.

Fig. 10. Economic impact of COVID-19 on remittance receiver countries

The roll out of vaccines will allow governments to reverse some of theemergency and stimulus policy measures put in place during 2020. These
include scaling back and stopping job-support schemes that could affectmigrant employment levels and allow the growth baton to pass from the public
to the private sector (Figure 12). While this is a necessary part of the recovery
process, it will be a difficult transition and there will likely be bumps in theprocess with medium-term economic scarring from the pandemic inevitable.

14

The remittance effectFig. 11. Economic impact of COVID-19 on remittance sender countries

While vaccine developments mean that the balance of risks around Oxford
Economics' baseline forecasts are now more evenly distributed, potential
negative impacts of downside scenarios are still larger than the potential
positive impact. A key risk to both advanced and developing economies is thatpolicymakers over-estimate the underlying strength of their recoveries andremove support too much and too early in an attempt to rein in deficits or preempt inflationary forces, stunting recoveries in their crucial early phase.
This is consistent with the view of Oxford Economics' survey of clients, whichshows the majority of governments are judged to be more likely to tighten too
much than too little (Figure 13). In this scenario, economies of the 20 largest
sender countries would be almost 8% smaller than in our current baseline by
the end of 2025 (Figure 14).
Fig. 12. Fiscal policy to become less supportive in 2021

Global: Fiscal impulse
Ppts of potential GDP
6.0
Advanced Economies

Emerging Markets

5.0

World

Forecast

4.0
3.0

2.0
1.0
0.0

-1.0
-2.0
-3.0
-4.0
2000

2005

2010

2015

2020

Source : Oxford Economics/Haver Analytics

15

The remittance effectFig. 13. Governments likely to tighten too much in 2021

Policy mistakes: Too much or too little?
As the economic situation evolves, do you think it is more likely that the
government/central bank will respond to uncertainty by providing too muchor too little support for the economy?
Too little
Too much% (GDP-weighted)

100
90

80
70
60
50
40
30

20
10
0
Monetary

FiscalSource : Oxford Economics

Fig. 14. The economic outlook remains uncertain

Fig. 15. GDP baseline vs. pre-COVID counterfactual

16

The remittance effectAlthough many developing countries will rapidly regain their 2019 GDP levels
due to their structurally higher growth, this is not a good measure of the impactof the crisis on their economies. A better comparison is against Oxford
Economics' pre-COVID forecasts. Against the counterfactual, Oxford
Economics expect both developing and advanced GDP to be 6.6% lower in
2020, with non-China developing countries 8.3% lower (Figure 15).
Fig. 16. Discretionary fiscal response to COVID-19 (% GDP) has been
higher in advanced economies

According to Oxford Economics' forecasts, advanced economies will recovermost of their lost ground by 2022, with GDP just 2.6% below the pre-COVID
counterfactual level. Overall convergence towards the counterfactual is weakerfor developing countries in comparison to advanced nations: GDP will recoverto just 4.5% below the counterfactual in 2022 and 3.8% lower in 2025. In part,
this reflects delays in receiving and administering the vaccine, with reportssuggesting that up to 90% of the population in developing countries will missout on being vaccinated against coronavirus in 2021. It also reflects developing
economy governments' lower capacity to support the economy during the
pandemic (Figure 16).

17

The remittance effectFig. 17. Widening differentials in GDP per capita between top remittancesender and receiver countries

It is also worth highlighting that despite aggregate GDP growth being relatively
strong in many remittance-receiving countries, the simultaneous growth in their
populations means that GDP per capita trends are more subdued. In fact, thegap in average GDP per capita between receiver and sender economies isforecast to widen over the next few years (Figure 17). This implies ongoing
motivation for out migration to receiving countries and high demand for
remittances from citizens in recipient countries.
3.2 IMPACT OF COVID-19 ON REMITTANCE FLOWSFor many developing countries, the substantial economic shock from thepandemic could be further magnified by a decline in remittance flows. Many
host/sender economies experienced record falls in GDP in 2020. This has
meant a disproportionately high impact on the migrant workforce in terms ofloss of jobs and earnings. This reflects their generally less stable employment
conditions and over-representation in informal sectors and lower-skilled jobs.
Migrants are also more likely to work in those sectors most affected by the
pandemic. For example, a quarter of workers in the EU hospitality sector areborn abroad, twice their share in total employment.
These developments are confirmed by recent survey evidence from Western
Union, which shows that approximately a third of remittance senders arereporting a negative impact on their incomes from the pandemic.
And even those who manage to continue working—such as those employed inhealthcare—may struggle to send money amid shutdowns and mobility
restrictions. This underscores the need for public authorities to treat remittanceservice providers as essential services (i.e., they should not be forced to close
during lockdowns) and mitigate any operational impacts to their functioning(e.g., regulatory and infrastructure barriers), as noted by the World Bank 13.

13

https://blogs.worldbank.org/psd/remittances-times-coronavirus-keep-them-flowing

18

The remittance effect

New inward migration also slowed in 2020 while return migration to homecountries increased. Reflecting these trends, the World Bank expects the stockof international migrants will decline in 2020 for the first time in recent history,
with this development a key driver of the World Bank's global remittanceprojections. Moreover, faced with sharp rises in unemployment rates, somehost economies are tightening visa restrictions and adopting other policies
affecting migrant employment, which will put further pressure on migrant flows(as discussed in Annex II).
Fig. 18. Impact of the pandemic on sender incomes relative to prepandemic

Lower levels of remittances are threatening to increase economic, fiscal, andsocial pressures in recipient countries at a time when they may also be
experiencing simultaneous outflows of private investor capital. This could also
negatively affect current account balances and could undermine the ability ofrecipient countries to finance their external debt and prevent their currencies
depreciating sharply.
3.2.1 Developments in 2020
Following the onset of the crisis, the World Bank predicted in April last year that
remittances to developing countries would decline by 20% in 2020 - thesharpest fall in recent history14. But more recent evidence indicates that the
decline in remittances is proving less abrupt than initially feared, with a partial
rebound in remittance levels having occurred in mid-2020 as many countries
came out of strict lockdowns.
This has led the World Bank to revise its estimates to a more modest fall of 7%
for 202015 (albeit this would still be a steeper decline than the 5% fallexperienced in 2009). This implies that remittances are proving far more

14

https://www.worldbank.org/en/news/press-release/2020/04/22/world-bank-predicts-sharpest-decline-of-remittances-in-recenthistory
15
https://www.worldbank.org/en/news/press-release/2020/10/29/COVID-19-remittance-flows-to-shrink-14-by-2021

19

The remittance effectresilient than FDI to developing countries, which UNCTAD 16 expect will see adecrease in the range of 35-35% in 2020.
The relative stability of remittances in the face of this negative impact on
incomes is explained by several factors. In some host countries, for example,
unemployed migrants were able to access government cash transfers offeredby national governments, helping to stabilize their incomes (although this was
not the case in Middle East countries); migrant jobs were protected bygovernment support schemes; and others have drawn down savings to sendmoney home.
Fig. 19. Change in remittances due to COVID-19 by end use

Limitations on travel are also likely to have reduced informal money transfers,
encouraging a shift towards formal (recorded) remittance channels. Not
surprisingly, Western Union's survey shows migrants have cut back mostsignificantly on transfers for discretionary spending and investment, whilst
regular support payments have been less seriously affected (Figure 19). This isalso supported through panels and survey analysis from Western Union
showing that senders have a strong desire to continue sending money andhave been highly motivated to support families and loved ones back home.
Indeed, Western Union's November 2020 COVID-19 Pulse survey showed that
64% of remittance senders give equal or more priority to the financial needs oftheir receivers.

16

UNCTAD (2020)

20

The remittance effectFig. 20. Recipient country currency depreciation in 2020 created arbitrage
opportunities and supported remittance inflows

Looking at the historic behaviour of remittances, there has been a very close
correlation with nominal GDP growth of the top 20 sender countries. This was
especially evident during the Global Financial Crisis and over the past decade.
Currently, Oxford Economics' estimates indicate that GDP of these economies
will shrink by 2.2% in 2020 in nominal US-dollar terms (the weakness of thegreenback in 2020 having softened the GDP declines of many sendereconomies when converted into US dollars). If the historically close correlation
is maintained, this would imply a contraction in remittances of a roughly similar
magnitude.
Fig. 21. Global remittances and GDP of sender countries

Several other developments also support the view that remittances remained
relatively resilient in 2020 and more resilient than predicted by the World Bank.
For example:

21

The remittance effecto Central bank data: A sample of inbound remittances reported monthly by agroup of central banks, comprising 15%+ of the global market, indicates yearto-date to October annual growth of +12% in principal inbound flows measured
at market exchange rates, even with sharp declines in growth recorded in Q2
as lockdowns hit economic activity hard 17.
o Money transfer companies: Aspects of financial reporting of some of thelargest money transfer companies have also shown strong resilience. For
example, higher transaction volumes compared to 2019 and stronger-thanexpected revenue outturns. This has led to some of these companies
reinstating a financial outlook for full-year 2020, having previously suspended
earnings guidance earlier in the year at the peak of the crisis.
o Improving consumer money transfer fundamentals: These fundamentals
include: strong digital revenue growth; the return of retail money transfer as
lockdown restrictions eased; a shift from informal to formal transfers asinternational travel collapsed and borders were closed; favourable forex
arbitrage opportunities as recipient country currencies depreciated, resiliency of
customers in sender economies with a strong desire to continue sending (afeature also of the Global Financial Crisis); and formal senders returning andnew senders entering the market. Together, these have contributed to offset
the macro impact of the pandemic, leading to a much stronger performance inQ3 versus Q2 2020.
On the other hand, the increase in COVID-19 cases toward the end of 2020
(and into the start of 2021) and re-imposition of lockdown restrictions haveaffected economic activity (albeit not as hard as Q2). This is likely to have
weakened remittance momentum in Q4 2020 (and into Q1 2021) following therebound in Q3 2020.
3.2.2 Outlook for 2021
The World Bank is currently forecasting a further decline of 7.5% in remittanceflows to developing countries in 2021. But the level of uncertainty around theeconomic outlook and fundamentals impacting the remittance market iscurrently much higher than usual, with risks in both directions but someindicators suggesting that remittance flows could prove more resilient than
expected.
In particular, Oxford Economics anticipates that nominal GDP of the top 20
sender economies will rebound strongly this year, with positive growth of 10.4%
in 2021. In this context, another sharp contraction of remittance flows in 2021
would imply an unusually sharp divergence from economic trends. Moreover,developing economies are likely to see slower vaccine rollout, which in addition
to smaller fiscal stimulus packages, suggests that the near-term economic lift
for these economies will be smaller in 2021 and therefore demand for
remittances will be very high. The strong economic rebound in advanced
economies may be supportive of remittance flows, allowing them to play animportant smoothing role in developing economies again in 2021.

17 High frequency and timely central bank data on remittances is available for Bangladesh, Colombia Dominican Republic,
Guatemala, Mexico, Pakistan, Thailand, El Salvador and Kenya.

22

The remittance effectFig. 22. Post-COVID global GDP recovery similar to the post-GFC reboundGlobal GDP
Pre-recession peak = 100
Q4 2019
Q2 2020
104

Q4 2020

Q2 2021

Q4 2021

102
100
98
96
94

Global financial crisis (bottom axis)

92

Current recession/recovery (top axis)

90
88
Q2 2008

Q4 2008

Q2 2009

Q4 2009

Q2 2010Source : Oxford Economics/Haver Analytics

That said, it is also important to consider the following potential headwinds toremittances in 2021 and recognise key uncertainties, in addition to economic
risks arising the latest imposition of lockdowns and new high transmission
COVID variants. For example:oCorrection in consumer money transfer fundamentals: New sources ofremittance flows seen in 2020 may not remain in the market in 2021. The
informal to formal shift could partly reverse as borders re-open and travelincreases, especially in adjacent corridors such as Europe, US-Mexico etc.
Although the informal to formal shift was already underway before thepandemic and is unlikely to return fully to previous shares, and global leisuretravel is only expected to recover slowly, with international leisure travel not
expected to return to pre-pandemic levels until 2023/24 based on Oxford
Economics' forecasts. Forex opportunities may be more limited as
currencies adjust to global changes (Oxford Economics predicts stronger
exchange rates for many recipient economies in 2021), resulting inincremental 2020 volume coming out of the market.

o "Scarring" and policy impact on migrant employment: While overall GDP
is forecast to rebound strongly, the outlook is not uniform across all sectors.
Migrants comprise ~20% of service workers in key send regions (US, EU),
with sectors like travel and tourism being slower to fully reopen and recover.
Longer-term migration will remain important to replace workers in sendereconomies ageing out of the workforce and migrants are key to health andsocial care sectors that will continue to grow. The roll-out of vaccines willallow governments to reverse some of the exceptional policy support
measures put in place throughout 2020 - including potentially job support
schemes - and allow the growth baton to pass from the public to the private
sector. While this is a necessary part of the recovery process, it will be adifficult transition, and there are likely to be bumps in the road and mediumterm economic scarring from the pandemic is inevitable. The decline in thestock of migrant workers and increase in return migration seen in 2020 could
potentially continue into 2021, even as economies rebound. This could be
23

The remittance effectdriven by the withdrawal of government support to the economy and direct
policies of some countries aimed at reducing migrant employment (seeAnnex II for more detail).
oDelayed increase in return migration: Travel restrictions may havedelayed the return of some migrants to their home countries. Migrants wholost jobs in 2020 (but had savings to remit that year) may not go back to theirhome countries until 2021 (so their remittances will disappear this year). In
other words, it could be that the full effect of return migration in 2020 on
remittance flows may not be fully seen until 2021.
Fig. 23. Employment in sender economies forecast to pick up in 2021, but
significant uncertainty and subsequent growth is more sluggish

The level of uncertainty around the economic outlook and fundamentals
impacting the remittance market is much higher than usual, affecting thecertainty around remittance flows in 2021. This means that the outturn for 2021
could fall anywhere within a wide range between a decline and a return to thepre-pandemic trend positive growth.

24

The remittance effectFig. 24. A recovery in cross-border travel will take some time

Global travel spend by segment% difference from 2019 levels
20%
0%
-20%
-40%
-60%

2020

2021

2023

2024

2022

-80%
International
Business

International
LeisureDomestic
Business

Domestic
LeisureSource: Tourism Economics

25

The remittance effect

4. SOCIO-ECONOMIC AND
DEVELOPMENT IMPACT OF
REMITTANCES
4.1 TRACKING THE REMITTANCE EFFECT
As illustrated in the diagram below, remittances have direct positive impacts on
individuals and households (referred to as "micro-level" impacts), as well as
feeding through to macro impacts at the whole-economy level.
At a micro level, remittances benefit recipient households in developing
countries by providing an additional source of income that helps to fundexpenditure and lower incidences of extreme poverty. These flows can also act
as a form of 'social insurance', supporting households' capabilities to resist
economic shocks. Transfers can help recipient households to increasespending on essential goods and services, invest in healthcare and education,
as well as allowing them to build their assets, both liquid (cash) and fixed(property), enhancing access to financial services and investment
opportunities.
Fig. 25. Remittance ripple effect through the economy

At a macro level, remittances fund additional spending, stimulating demand forgoods and services throughout the economy. The initial increase in spending
has a direct effect on GDP, but it also sets off a chain of additional spending
throughout the economy. Money spent in one area is received as income
elsewhere, leading to further rounds of spending. While this flow diminishes
26

The remittance effectwith successive rounds, the impact of the initial increase in spending ismagnified. The "multiplier effect" describes this dynamic.
The multiplier effect refers to the proportional amount of increase (or decrease)in final output that results from an injection (or withdrawal) of spending. The
size of the multiplier depends upon the share of transferred funds spent byrecipient households (which evidence suggests is large in the case ofremittances) and how these funds are spent. Clearly, spending on
entrepreneurial investment or consumption can have an immediate, direct
impact on output and employment, but it can also have important indirect
effects as it feeds through the economy.
The size of the multiplier is also determined by what proportion of the marginalincrease in income goes into taxes, saving (or paying off debt), and imports.
These three factors are known as "leakages," because they determine howmuch demand "leaks out" in each round of the multiplier effect. If the leakages
are relatively small, then each successive round of the multiplier effect will
result in incremental higher demand, and the multiplier effect will be higher.
Remittances can also have longer-term influences on the economy andincrease the future supply-side capacity and potential growth rate of theeconomy, in addition to having a short-term demand stimulus. For example,
educational investments are usually motivated more by the well-documented
effects that education has on well-being and economic growth in the long-run18.
According to economic growth theory, investment in human capital can directly
raise the economy's potential output. For example, empirical estimates suggestthat a one-year increase in average years of education raises the level of
output per capita by between 3 and 6 percent19. Similarly, spending on
entrepreneurial investment can act as a potential mechanism for longer-term
economic development, increasing the economy's capital stock and potential
rate of output growth.
4.2 USE OF REMITTANCES IN RECIPIENT COUNTRIESHow remittances are used by their recipients ultimately determines their impact
on social and economic outcomes in the recipient country -- and the size of themultiplier effect. Survey evidence from Western Union provides some important
insights into the use of remittances as identified by senders. The survey
confirms that a relatively high share of remittances to developing countries arebeing sent to meet the essential needs of families, including basic consumption
and healthcare. These categories are particularly high in some of the largest
recipient countries, such as India, Mexico, the Philippines and Nigeria.
Education is another significant expenditure item, which includes spending onschool and college fees, as well as books and other necessary educational
materials. According to UNESCO (2019), international remittances haveincreased education spending by 35%, on average, across Asia and subSaharan Africa, with the effect being even larger in Latin America (53%).

18
19

For example, Manuelli and Seshardri (2014)
IFS (2005) provide a review of the literature on the returns to education.

27

The remittance effectRemittances can therefore be viewed as an important funding source foreducation in developing countries.
A number of empirical studies have indicated that remittances may be treateddifferently by recipient households than other sources of income. The findings
show that the households receiving remittances spend more at the margin on
investment goods, especially housing and education, and spend less, at themargin, on food items. Given the difficulty of borrowing in countries with
underdeveloped financial systems, remittances can also help to ease liquidity
constraints, helping recipients to invest in business ventures and takeentrepreneurial risks.
The Western Union survey findings on the use of remittances are broadly inline with other survey evidence of end-users of remittances. For example, Ayuk
et. al. (2015) find that households in Nigeria spend the majority of funds (58%)
on basic consumption and healthcare, with 16% spent on education; a study by
the Reserve Bank of India (2010) found that about 61% of remittances in India
are used for 'family maintenance', whilst 27% are used for savings andinvestment; and a study by the Inter-American Development Bank (2003),
found that 78% of remittances in Mexico are used for 'regular' expenditures(which could include paying bills/debts), whilst 7% was spent on education andaround 10% saved or invested.
Fig. 26. Use of remittances by recipient households
Advanced
Developing
economyeconomyaverageaverage
Reason for sending
India
Essential expenses
29%
48%
49%
Living expenses
27%
46%
47%
Medical bills
4%
7%
8%
Education
14%
17%
14%
Other bills/debts
10%
10%
10%
Discretionary consumption
53%
37%
32%
Gifting24%
19%
13%
Purchase of goods
23%
15%
18%
Tourism & Travel
19%
11%
10%
Investments
22%
20%
27%
Savings
11%
9%
13%
Real estate
11%
10%
13%
Other investment
9%
8%
12%
Other/unknown
7%
8%
10%
Note: Totals do not sum to 100% as funds may be used for multiple purposes
Source: Western Union Global Usage and Attitude Survey (2018)

Mexico
55%
50%
13%
9%
18%
47%
28%
18%
14%
28%
14%
17%
6%
3%

Philippines
54%
51%
7%
19%
9%
25%
16%
11%
4%
17%
8%
7%
7%
9%

Nigeria
57%
53%
17%
12%
17%
27%
14%
13%
3%
17%
3%
9%
6%
7%

28

The remittance effect

5. MEASURING THE IMPACT OF
REMITTANCES
5.1 LITERATURE REVIEW EVIDENCE
Given the scale and importance of remittances for people in developing
economies living on just a few dollars per day, the welfare impacts ondeveloping countries are largely undisputed. Indeed, numerous empiricalstudies have documented the impact of remittances on poverty reduction.
For example, Adams and Page (2005) analysed the results of household
surveys across 71 developing countries and found that a 10% increase in percapita international remittances leads, on average, to a 3.5% decline in theshare of the population living in poverty. Similar conclusions are reached by
Banga and Sahu (2014) in a study of 77 developing countries, showing that a
10% average increase in remittances reduces the poverty headcount ratio by
3.1%.
On the other hand, the effect of remittances on economic growth is a questionof considerable debate amongst researchers, with empirical studies showing
mixed results. In part, this likely reflects the inherent difficulties in modelling thecomplicated linkages between remittances and economic growth anddisentangling the effects of other factors.
For example, one important consideration is that remittances may bothinfluence and themselves be influenced by output growth in recipient
economies. When growth is relatively weak, remittances may increase bothbecause emigration increases and because existing migrants increase financial
help to families at home. Moreover, these studies tend to focus on the direct
short-term impact of remittances on the recipient economy, whereas indirect
impacts from investments in human and physical capital may only be realisedin the long-term.
Some studies emphasize the role of remittances in financing essential
consumption, suggesting that the resulting impact on the economy is modest atbest (Spatafora, 2005). Conversely, Giuliano and Ruiz-Arranz (2005) find apositive relationship between remittances and economic growth, but only forcountries with less developed financial systems, as they help to alleviateliquidity constraints.
Indeed, most recent studies emphasize how impacts differ across countries,
although there is some disagreement on the role of the financial system. For
example, Bettin and Zazzaro (2012) find that an efficient domestic banking
system helps to channel remittances toward productive uses, increasing theimpact on output. The complementarity of remittances and financial
development is also emphasised by Nyamongo et. al. (2012).

29

The remittance effectFig. 27. Summary of recent studies into the impact of remittances on GDP
Country sample
100 countries

Period1975-2002

Main findings
An increase by 1% point in the remittances/GDP ratio leads to a 0.2%
increase in GDP per capita

Study
Giuliano and Ruiz-Arranz(2005)

115 low and middleincome countries

1980-2008

A $1 increase in remittances leads to a $0.82 long-run increase innational income

Karpestam (2011)15 MENA countries

1980-2009

A 1% point increase in remittances/GDP leads to a 0.2% increase in
GDP per capita

Mim and Ali (2012)

36 African countries

1980-2009

A 1% point increase in remittances/GDP leads to a 0.4% increase in
GDP per capita

Nyamongo et. al. (2012)

66 developing countries

1970-2005

A 1% point increase in remittances/GDP leads to a 0.2% increase inGDP

Bettin and Zazzaro (2012)

6 Eastern European
countries

1999-2013

A 1% point increase in remittances/GDP leads to a 0.3% increase in
GDP per capita

Meyer and Shera (2017)

In general, the magnitude of the estimated impacts of remittances on economic
growth from the studies reviewed is comparable to estimates for FDI and ODA,
which have also shown some mixed results. For example, Rajan and
Subramanian (2005) argue that a 1 percentage point increase in the ratio of aid
to GDP should at most raise economic growth by 0.16%, assuming all aid isinvested, or close to 0.1% if some aid is wasted or consumed. Meanwhile,studies of FDI suggest diverse effects at the country level depending on
absorptive capacity and institutional quality.
5.2 QUANTIFYING THE ECONOMIC EFFECT OF REMITTANCESThe empirical literature on remittances does not provide any definitive answers
on the scale of their economic impacts, with results generally contingent on
particular circumstances or country-specific characteristics. It is generally
agreed that the use of remittances for consumption or investment spending isimportant (albeit a lack of consistent cross-country evidence means this has
not so far been considered explicitly within the literature), with institutional
quality also playing a role in facilitating the productive use of remittances.
Still, the available evidence does suggest that a reduction in remittance flows todeveloping countries has the potential to magnify the current pandemicinduced economic downturn. A simple exercise can help to illustrate thepotential impact of the decline in remittances on GDP of developing economies(the major recipient countries). Using central bank data on remittance trends for
Jan-Oct 2020 together with the World Bank's forecasts of regional trends (forcountries without monthly central bank data) 20, we apply a multiplier of 0.4 (an20Specifically, central bank data was used for Bangladesh, Dominican Republic, Guatemala, Mexico, Pakistan. World Bank
regional estimates were applied for South Asia (India, Indonesia, Nepal, Philippines, Sri Lanka, Vietnam), East Asia & Pacific(Tonga), Europe & Central Asia (Ukraine), MENA (Egypt) and Sub-Saharan Africa (Nigeria).

30

The remittance effectaverage of the estimated multipliers across the studies we reviewed) toillustrate the likely implications for GDP.

The remittance multiplier
The remittance ‘multiplier’ effect refers to the proportional amount of increase(or decrease) in final output that results from a transfer of these funds into thereceiving economy. Estimates of the magnitude of these effects varysignificantly and so we have used an average of the studies reviewed. Thissuggests a multiplier value of 0.4, indicating that every $1 of remittancestranslates to a $0.40 increase in final GDP. Applied to the World Bank
developing-country remittance estimate of $548bn in 2019, this translates to a
direct GDP impact on these economies of $219bn (the domestic recipient
economy GDP impact is $219bn in total – not $548bn plus $219bn – becausepart of the remittance short-term impact is used for imports or savings).
The fact that the remittance multiplier is lower than one is reflective of‘leakages’ – some of the funds are saved or used to pay off debt (not spent)and a high share of spending in developing economies is likely to be on
imported goods (e.g. medicines). A lack of investment opportunities indeveloping economies may also explain why remittance flows often fail togenerate self-reinforcing development. But as noted by the World Bank (2006),
multiplier effects may well be larger at the regional level.
The average remittance multiplier estimates of 0.4 also reflects only the shortrun impact of spending rather than the longer-run impacts on the economy’s
supply capacity due to the transformative effects of increased spending on
education, health, and other investments. In Oxford Economics’ view, theavailable literature therefore has shortcomings in terms of fully measuring the
economic impact of remittances and multiplier effects. A more complete
measure of remittance economic impacts including short and long-term effects
would likely result in a larger multiplier than 0.4.

31

The remittance effect

The results of this analytical exercise show that the economic crisis in 2020 islikely to have been magnified for many developing countries receiving a large
amount of remittances. While the negative impact should be relatively modest
for larger economies such as India (where remittances represent a relatively
small share of GDP), the hit to GDP may be much more significant for smaller
countries such as Tonga and Nepal (which are yet to publish full year 2020
GDP data_. In contrast, remittance flows potentially expanded in a few
countries (based on central bank data) in 2020, notably Mexico, Pakistan, andBangladesh, meaning remittances would have helped to offset the severity ofthe downturn there.
5.2.1 Potential GDP impacts on receiver countries from a decline inremittances in 2020

The chart also shows a 'downside' scenario based on the 20% decline in flows
originally projected by the World Bank. This illustrates how a larger decline inremittances would have had a much more substantial negative impact on thesedeveloping economies in 2020 and lead to even weaker growth than predictedby Oxford Economics. It also underscores how the stability of remittance flows
is again proving to be a crucial lifeline for these economies at a time of
economic crisis.
Clearly these estimates are subject to a high degree of uncertainty.
Nevertheless, they illustrate a potentially important transmission mechanism forthe crisis to affect developing economies that is often overlooked.

32

The remittance effect

6. CONCLUSION
Remittances are an underappreciated but valuable source of financing fordeveloping countries to attain sustainable development goals and support
households and economies (micro and macro impacts). While migrant
remittances contribute to the development of their home country, migrants also
contribute to the host country by filling the gap between labour demand andsupply and making a positive net fiscal contribution.
There is no government intervention involved in remittances - individuals are
single-handedly responsible for the movement of capital across the world's
borders. Remittance flows tend to remain relatively stable through the businesscycle, thereby having the potential to support households in the face ofeconomic adversity. These flows are targeted to meet the specific needs of therecipients who do not necessarily have any form of social protection.
Cross-border remittances represent migrants' ongoing involvement with theirfamily, home nation, and community. By transferring home significant amountsof money, but also information, ideas and practices, migrants can help tocatalyse wider changes in their countries of origin. In this way, remittances
represent globalization with a human face, contributing to the spread of global
interdependence at all levels – social, economic and political.
Migration should be accepted as mutually beneficial for both origin anddestination countries. Public authorities should also treat remittance service
providers as essential services (i.e. they should not be forced to close during
lockdowns) and mitigate any operational impacts to their functioning (e.g.
regulatory and infrastructure barriers).

33

The remittance effect

ANNEX I: MEASURING REMITTANCE
FLOWS
A key challenge for policymakers, researchers and investors interested inremittance flows concerns the accuracy and consistency of available data. The
varied nature of remittance transactions makes the compilation processcomplex, resulting in a systemic problem of under-reporting of flows and data
asymmetries between host and recipient countries.
The main source of data on remittances is the World Bank, which combines
national balance of payments data compiled by the International Monetary
Fund (IMF) with country information. Global estimates of financial transfers by
migrants include transactions beyond what are commonly assumed to beremittances, as the statistical definition used for the collection of data on
remittances is broader. Moreover, data inconsistencies between different
jurisdictions arise because concepts and methodologies are not applied
uniformly across countries, with different interpretations of definitions,classifications and data sources, as well as the use of different compilation
methods. Constraints on resources and institutional capacity also limit theability of many countries to collect the necessary data.
Although household survey data has been used to estimate remittances, there
are well-known issues with respondents under-reporting income. Indeed, theimplied estimates of national remittances from these surveys are well below thevalues recorded in the balance of payments.

The balance of payments data only covers formal remittance channels such as
money transfer services offered by banks, post office banks, non-bank financial
institutions, and forex bureaus and money transfer operators such as Western
Union. But a large share of remittances is believed to flow through informal
channels, which are often more convenient and cheaper than formal ones.
Informal channels include cash transfers based on personal relationships

34

The remittance effectthrough business people, or carried out by courier companies, friends, relatives
or oneself. In addition, Hawala (an international network of money brokers) andHundi (a form of credit instrument) systems operate in parallel to formal
remittance channels. Freund and Spatafora (2005) estimate that informal
remittances are equivalent to around 35–75% of officially-recorded remittances
to developing countries.

35

The remittance effect

ANNEX II: MIGRATION POLICIES IN
THE WAKE OF COVID-19
In the wake of the COVID-19 pandemic, countries across the world have
temporarily closed borders and halted travel and migration to protect
populations from the spread of the virus. Although these restrictions will
eventually be eased, the enduring impact of the economic crisis on hosteconomy labour markets could fuel a shift toward a more permanent tighteningof immigration policies.
For example, in the world's largest source of remittance outflows, the UnitedStates, the Trump administration had blocked foreign workers on H-1B visas
and other temporary visas from entering the country up to the end of March
2021. Also, in early 2021, the random selection process for H-1B visa
allocations was replaced with a wage-based selection process. While theincoming Biden administration has a more pro-immigration stance, a lastminute policy push from the Trump government to tighten measures could slow
down efforts to undo these actions.
In the GCC region, some countries have pushed to significantly lower
immigration. In particular, Oman is adopting a policy of expat substitution in
public and private sector jobs, while Kuwait is pursuing a targeted reduction in
the expat population to 30% from the current 65%. In Saudi Arabia, thenumber of migrant worker permits granted dropped from around 550,000 in H1
2019, to a mere 55,000 in H1 2020.
On the other hand, several countries in the region are choosing to 'embrace therole of foreigners'. The UAE is embracing foreign investment and talent to drive
the recovery through recent reforms that allow 100% foreign ownership ofonshore companies and visa reforms. Qatar is also encouraging foreign
participation with reforms to their property ownership law to incentivize expats
to secure residency.
In Europe, which has been grappling with an anti-immigration and anti-refugee
sentiment from some nations and sections of the population in recent years,
the pandemic has exacerbated the vulnerability of migrant workers. Owing to
Brexit, the UK was already moving to a stricter points-based immigration
system to be implemented in a post-Brexit world. Researchers at Oxford
University indicate that under the new proposed U.K. Immigration Bill, 53
percent of EU-born and 42 percent of non-EU-born workers in key occupations
will not meet the requirements for a post-Brexit visa. There is a concern that
this policy would result in worker shortages and a decline in productivity.
While the trend has been towards tightening immigration policies in thedeveloped world, some advanced countries are making an active policy choice
to encourage immigration. Owing to sharp labour shortages and an aging
population, Japan recently authorised a sharp increase in the number offoreign workers; a new bill approved more than a quarter-million visas of fiveyear duration to unskilled guest labourers.

36

The remittance effectOverall, the COVID-19 pandemic has ended a decade of growth in internationalmigration, according to the OECD 2020 International Migration Outlook. Job
losses for existing migrants, combined with the sharp decline in new flows,
could be a cause of serious concern for economies that are heavily dependent
on overseas workers sending money back to their families.

37

The remittance effect

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De, Islamaj, Kose and Yousefi (2016), "Remittances over the business cycle:
Theory and evidence", Australian National University, Centre for Applied
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Giuliano and Ruiz-Arranz (2005), "Remittances, financial development, andgrowth", IMF Working Paper WP/05/234
Hassan and Holmes (2015), "Do remittances facilitate a sustainable current
account?", The World Economy Vol.39
IFS (2005), "The returns to education: A review of the empiricalmacroeconomic literature", WP02/05
Inter-American Development Bank (2003), "Remittance receipts in Mexico"
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countries", Journal of Economic Studies, Vol.39(5)Manuelli and Seshardri (2014), "Human capital and the wealth of nations",
American Economic Review Vol.104
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